Must the Department offset a tax balance with the taxpayer's interest credit from overpayments as of the date the net tax was determined?

Plain-English summary

This Final Written Determination resolves a dispute over how the Department calculated interest after an IRS audit. The short version: the taxpayer was right — the Department should have offset the net tax balance with the taxpayer's overpayment interest credit as of the date the net tax was determined, and the leftover interest credit does not itself earn interest.

The facts: the IRS examined the taxpayer's federal returns for 1989–1994 and issued a Revenue Agent's Report (RAR). The taxpayer filed amended Kansas returns reflecting the adjustments, showing overpayments in 1989, 1990, 1991, and 1993 and underpayments in 1992 and 1994. The Department's analysis produced a net cumulative tax of $636,217.00 as of April 15, 1995, while the taxpayer had accumulated $740,546.00 of interest from the overpayments. The Department kept charging interest on the $636,217.00 balance through September 15, 2000, then subtracted that additional interest ($367,415.00) from the interest credit — arriving at a $263,086.00 assessment.

The taxpayer disputed that methodology, contending the Department "should have offset the April 15, 1995 tax balance of $636,217.00 with its . . . interest credit from the overpayments" as of that date, which would have left a refund rather than an assessment.

The Secretary's Designee agreed:

• Offset at the date the net tax was fixed. "[O]nce the amount of the net cumulative tax was determined at the end of the tax periods on April 15, 1995, the Department should have offset the tax at that time with the Taxpayer's cumulative interest credit from the overpayments." Because "[t]he Taxpayer's interest credit was greater than its net cumulative tax," the offset left an interest-credit balance.
• No interest on interest. "The amount of the interest credit balance would not accrue interest because the Department is not authorized to pay interest on interest."
• Result. The Designee directed that the $636,217.00 net tax "be offset by its $743,743.00 interest credit from the overpayments" (the figure rose after "the correction of a calculation error increased the amount of the interest credit"), and that the resulting "$107,526.00 balance consisting of interest only shall be refunded to the Taxpayer without interest."

What this means for you

Taxpayers resolving multi-year audit adjustments

When amended returns across several years produce both overpayments and underpayments, the interest credit from your overpayments should be offset against the net tax as of the date the net tax is determined — not left to accrue against you while the Department keeps charging interest on the gross balance.

Interest does not compound in your favor

Any interest-credit balance left after the offset does not itself earn interest. Kansas is "not authorized to pay interest on interest," so a refund of that balance comes without additional interest.

Check the Department's netting date

The methodology dispute here turned entirely on timing — offsetting as of April 15, 1995 versus carrying the balance forward. If you face a similar calculation, confirm the date the Department used to net your overpayment interest against your tax.

Common questions

Q: When should the Department offset my overpayment interest against the tax I owe?
A: As of the date the net cumulative tax is determined. Here that was April 15, 1995, and the interest credit exceeded the tax, producing a refund.

Q: Does the leftover interest credit earn more interest?
A: No. The Department is not authorized to pay interest on interest, so the interest-only balance is refunded without further interest.

Q: Did the taxpayer win?
A: On the methodology, yes. The Designee adopted the taxpayer's offset approach and ordered a $107,526.00 interest-only refund (without interest).

Citations and references

• Interest-offset methodology — the Secretary's Designee held the Department must offset the net cumulative tax with the taxpayer's overpayment interest credit as of the date the net tax is determined, and that any remaining interest-credit balance does not accrue interest because the Department cannot pay interest on interest. (The determination cited no specific K.S.A. section for this holding.)

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: WFD-P-2001-4

Original ruling text

Final Written Determination

Body:

Office of Administrative Appeals

July 6, 2001

Written Final Determination, Docket No. 00-497

On September 15, 2000, the Taxpayer timely filed a written request for an informal conference with the Kansas Secretary of Revenue (Secretary). This was in response to a Notice of Final Assessment dated July 20, 2000 from the Kansas Department of Revenue (Department).

The Internal Revenue Service (IRS) conducted an examination of the Taxpayer’s federal tax returns for the years 1989 through 1994, inclusive. At the conclusion of the examination an IRS Revenue Agent’s Report (RAR) was issued to the Taxpayer. The Taxpayer then provided a copy of the RAR together with amended returns based on the adjustments to the Department. The returns indicated that the Taxpayer overpaid in 1989, 1990, 1991 and 1993, and underpaid in 1992 and 1994. The Department’s analysis of the amended returns resulted in a net cumulative assessment of $636,217.00 in tax for the 1989 through 1994 period. During this same period the Taxpayer was credited with $740,546.00 in interest from overpayments. The Department continued to charge interest on the April 15, 1995 tax balance of $636,217.00 through September 15, 2000. The additional interest on tax owed of $367,415.00 was then deducted from the Taxpayer’s interest credit of $740,546.00 to leave the Taxpayer an interest credit balance of $373,131.00. The deduction of the $373,131.00 interest credit from the $636,217.00 April 15, 1995 tax balance resulted in a total net tax and interest due of $263,086.00, the amount of the Department’s assessment. The Department did not assess a penalty.

The Taxpayer disputes the calculation methodology used by the Department at the end of the RAR period and contends that the Department should have offset the April 15, 1995 tax balance of $636,217.00 with its $740,564.00 interest credit from the overpayments. This would have entitled the Taxpayer to a $104,329.00 refund of the remaining interest credit.

Upon review it appears that once the amount of the net cumulative tax was determined at the end of the tax periods on April 15, 1995, the Department should have offset the tax at that time with the Taxpayer’s cumulative interest credit from the overpayments. The Taxpayer’s interest credit was greater than its net cumulative tax. The application of the offset to the tax due would have left the Taxpayer with an interest credit balance. The amount of the interest credit balance would not accrue interest because the Department is not authorized to pay interest on interest.

Upon reconsideration of all of the facts and issues underlying the Taxpayer’s request for an informal conference, it is the final determination of the Secretary’s Designee that the net cumulative tax of $636,217.00 owed by the Taxpayer on April 15, 1995 be offset by its $743,743.00 interest credit from the overpayments. The $107,526.00 balance consisting of interest only shall be refunded to the Taxpayer without interest. (Note: the correction of a calculation error increased the amount of the interest credit)

Sincerely,

David J. Heinemann
Secretary’s Designee

Date Composed: 07/12/2001 Date Modified: 10/09/2001

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